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Pay Harmony? Social Comparison and Performance Compensation in Multibusiness Firms

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  • Claudine Gartenberg

    (NYU Stern School of Business, New York, New York 10012)

  • Julie Wulf

    (National Bureau of Economic Research, Cambridge, Massachusetts 02138)

Abstract

Our study presents evidence that social comparison influences both the level of pay and the degree of performance sensitivity within firms. We report pay patterns among division managers of large, multibusiness firms over a 14-year period. These patterns are consistent with employees comparing pay against both their peers (horizontal comparison) and the chief executive officer (vertical comparison) within their firm. Horizontal comparison also appears to reduce pay–performance sensitivity, in accord with prior theory proposing that performance pay can lead to perceived pay inequity among employees. Taken together, our evidence suggests that agency costs and social comparison jointly influence pay within firms. The evidence also supports the notion that managers of multibusiness firms are constrained in the degree to which they can incentivize employees, given the firm-imposed reference group.

Suggested Citation

  • Claudine Gartenberg & Julie Wulf, 2017. "Pay Harmony? Social Comparison and Performance Compensation in Multibusiness Firms," Organization Science, INFORMS, vol. 28(1), pages 39-55, February.
    • Handle: RePEc:inm:ororsc:v:28:y:2017:i:1:p:39-55
    DOI: 10.1287/orsc.2017.1109
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